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Conversations about the media economy, and how to think clearly when things get messy.
This is Puzzle, Problem, Mess. Conversations about the media economy and how to think clearly when things get messy. In this episode, I'm thrilled to speak with Alicia Reese of Wedbush Securities. Alicia is SVP of equity research, media and entertainment, and consumer entertainment products, covering a variety of sectors with a primary focus on the movie and entertainment industries, and Alicia is based in The US. Alicia currently covers theatrical entertainment companies such as AMC and IMAX, streaming focused companies such as Netflix and Roku, consumer products companies such as Logitech, and video games companies such as Nintendo, Take Two, Ubisoft, Unity, and Roblox.
Dan Fahy:The subject of this episode is Netflix. And given Netflix has business lines in all these sectors now, subscription and ad funded streaming, theatrical, games, and consumer products, Alicia has a remarkably unique view of where Netflix is headed. This is a terrific conversation packed with insights. I hope you enjoy it. Here's Alicia Reese.
Dan Fahy:Alicia, welcome to the podcast.
Alicia Reese:Thank you so much for having me. I appreciate it.
Dan Fahy:Alicia, the the popular characterization of Netflix tends to be through the lens of Netflix as a premium long form video streamer whose peer sets are therefore Disney plus, HBO Max, and perhaps in some ex US markets, the large national broadcasters. But there's also an emerging view of Netflix as a platform in which Netflix content is starting to act as sort of a top of the funnel draw into an increasingly diverse set of revenue streams. And indeed, there's Netflix acting as a platform for other content distributors such as the TFN model in France. From your perspective, what model do you think fits Netflix now?
Alicia Reese:It's gone through a series of transitions, business model transitions over the years. So I'll give a little of that background and then get to your question really where Netflix is now. I'd say for a long time, the streamers, and that was led by Netflix and initiated by Netflix. They were judged solely on subscriber growth and churn levels, you know, by extension. And as a first mover and and really a differentiated platform from anything that had come before, Netflix was able to license content from various sources and eventually they produced their own content and they were able to expand their library in several different ways and that really helped them to drive that global growth that they saw.
Alicia Reese:They had a huge head start in the streaming wars because of that differentiated model. They didn't have to, like Disney or Paramount or Fox or anyone else, have to rely on their own library content and produce all new content to fill their streaming platforms. Now, eventually, and I'd say not very long ago, just a couple of years ago, investors began to shift away from that subscriber growth focus to more, you know, whether the streamer could grow and achieve profitability. And so with that shift toward, you know, all of the streamers trying to achieve profitability, and this was the case not just for the streaming services, but the streaming platforms like Roku and Amazon. Once again, Netflix led that charge in my opinion, and they reached the profitability early and they had a meaningful advantage there because of it.
Alicia Reese:So one of the reasons why I think it's savvy content sourcing, it's been because of its global markets and it's been able to source content from its global markets and it began displaying that global content just to those certain markets where they sourced it and then they realized they could leverage that throughout the pandemic they really started to leverage this global sourcing throughout its global footprint And people loved this content. Korean content became quite popular, if you recall. And so I think that was really savvy and very profitable for Netflix. And it gave them a huge advantage across the market. I would say the difference now is that, yes, it's judged on subscriber growth, which it no longer gives.
Alicia Reese:So we have to guess at that. It's judged more so on profitability, which it wants us to. It's increasingly encouraged investors to look at the profitability and layering on the ad tier has certainly pushed it towards that. But it is very profitable, hugely profitable, massive free cash flow generator. And now it is in the in the situation where everyone is focused more on engagement.
Alicia Reese:And so this is really where things start shifting. The engagement is, of course, important for the ad tier, because if you don't have significant engagement, the advertisers have nothing to advertise against. And if you have people shifting to the ad tier and watching less, then you have less revenue overall. But that's not necessarily a black and white picture. I think Netflix is seeing what it had said before is that I think Greg Greg Peters on the call said not ours are equal.
Alicia Reese:And that really is an important point that he made there that I think fell on some deaf ears and some people have really kind of given that some thought. For us, the way we look at it is some of the things that management brought up. Live programming runs about 5% of 2026 content spend, but only 1% of view hours. Fine. The live events drove significant sign ups, and that's both new sign ups and also people returning to the service.
Alicia Reese:For a long time, what you had was people churning out when they were expecting to not watch quite as much as they had been before. Now they're downgrading to the ad tier. And we'll come back to that because I think it's a really important point. The other side of the token is that this is significantly more profitable content on which Netflix is showing the live programming. You also have animations and kids family content.
Alicia Reese:That's also quite a bit of money that Netflix spends on that. And it's the same 5% of content spend but it delivers roughly 8% of view hours. That's that's significant and I'd say the most valuable part of the animation and kids family content is that if you are in a family and your kids are into shows or that's just one of your primary avenues for your kids content, then you're not going to be churning out or at least you're not going to be churning out very often because you don't have too many alternatives. You have maybe Disney and a couple others, but especially if you have a young kid who watches Cocomelon or something like that or Bluey, you'll have your Disney and you'll have your Netflix and these are really important. As your kids age, they needed a little bit more, so they just introduce the kids only video games.
Alicia Reese:And so having that in a very specific environment where there's no ads, it's fully protected. There's nothing that the parents have to really guide with parental controls. That leaves a significantly calmer parent with that subscription in the face of what you have with Roblox and a lot of other streaming services, Discord. There's so many issues. Social media, there's so much of a, you know, such a hairy regulatory environment right now that people really want to steer clear from as much as possible.
Alicia Reese:And Netflix just gave them a nice alternative for those pre teens and adolescents on the service. So I'd say there are a variety of different things that Netflix is doing heading towards that platform, because the platform allows Netflix to drive engagement across the household at varying levels to where it's always needed, always on. And there's engagement on various levels and they need that. So, yes, for a long time, it was the former. It wants to be judged as a platform now.
Alicia Reese:And it's seeing kind of rising engagement, which was the bear case for a while. So I think it's working on both ends and it's not being given full credit for that.
Dan Fahy:Thanks for talking to the engagement piece there. There was a lot of focus on Netflix engagement metrics in the results in mid July, and Netflix perceived software engagement was flagged by some commentators as a genuine cause for concern, particularly around the engagement of returning seasons. And you and I have discussed prior to this call the data from Ender's analysis in The UK suggesting that narrative is probably overstated. The Ender's data describes how Netflix dramas lose around 20%, 28% of viewing between seasons one and two, which in The UK is broadly comparable to BBC One, which loses 28% as well. ITV One, which loses 25% and Disney Plus in The UK loses 24%.
Dan Fahy:But what significance do you apport into Netflix engagement figures?
Alicia Reese:Yeah. I think there are a lot of several levels to that. And I think the point that you make with the data you suggested here with the Ender's data that this makes this makes a lot of sense. I... Netflix isn't a standout in this category.
Alicia Reese:Second season engagement does drop. I'd say perhaps in The UK more so than The US and probably Europe and Australia and other locations, you'd have a similar effect. That's why you see a lot more shorter series, fewer seasons, lots of mini series. And I would argue that Netflix is shifting towards that. They have a lot more mini series than they used to.
Alicia Reese:And they have to find a good balance between the several seasons long series that drive significant engagement over a longer period of time, And these highly engaging mini series or fewer season series that just drive continual engagement. I don't think they're really different from anything else, though, in that I think your point is well taken. The the bare thesis is that they need to drive rising engagement as they continue to spend more money on content and as they continue to grow their subscriber base globally. Because what you see is that they're spending more for user acquisition and spending more on content overall than they're getting back in terms of engagement per user. But really, that's okay.
Alicia Reese:I'd say a while back, a few years ago, they implemented the password sharing situation where they cracked down and forced people who aren't in the same household to get separate subscriptions or just churn out. And on that level, of course, you're going to have less household engagement if the people who weren't actually in your household are not there anymore. So the people who are left are going to be watching less TV, and you'll have more single people subscribing to the service who watch less than they would have within a household. So per household, you just have less engagement overall. I think that really started to be complete within the numbers by the end of twenty four and early twenty five.
Alicia Reese:So beyond that, you might see some continual declines. But I think that's because a lot of the people who are spending time on the platform are watching some of these shorter form pieces of content, and that's engaging enough for them to stay on the service and not churn out. People are just churning out less. And if they churn out less, what they're choosing to do in a lot of cases is downgrade to the the ad tier instead of churning out. And so maybe there is a period of time where they were planning on not watching as much.
Alicia Reese:And so before they would have just paused their subscription, and now they are instead choosing to use the ad tier. So there's two two layers to that. And I think we'll get to that later, where this is applicable in a couple places, one on engagement and one on ad tier engagement as well.
Dan Fahy:Yes, there is that thread through to the end as analysis data that we discussed prior to the call. Also spoke to that point you've just highlighted there, which is that in the analysis that enders have done, and I know Wedbush has got some analysis on this too, but they seem to suggest that of the subscribers who've churned down from the no ads tier to the ad tier, they tend to be watching less once they're in the ad tier. And the thesis in the end analysis is that given that that it makes for a large cohort of the ad tier subscribers now, people who were former on the no ads are on the ad tier, that might hint at a sort of suppressing effect on engagement of the ad tier. But what do you see from Wedbush's point of view?
Alicia Reese:Yeah. We see a few different things. And and I would point to some of the ENDRS data as well as our survey data to kinda get to the point here. It is a behavioral story in a lot of ways. The the effect of planned viewership declines trending down to the ad tier, trading down to the ad tier for a period of time would shift that data toward that situation where you're going to have less engagement on the ad tier.
Alicia Reese:That being said, I still think you have a very high volume of C2 DE households concentrating in that ad tier and kind of pulling that average up over time. You see that across services, though. I mean, if you don't have money, a lot of disposable income to spend on your subscription tiers, you're of course going to go for the ad tiers. And you're probably gonna use that quite a bit and have fewer services, so your viewership is concentrated towards a fewer number of services. Whereas if you're higher income, you're going to have more services.
Alicia Reese:And whether or not you watch a lot, in a lot of cases, people aren't watching a lot, but they have a lot of services. So their engagement hours are a bit lower. And so I think that's really what the data shows over time. I think net really the composition effect, it dominates at that lower at that tier level, but it's a contained effect and exists only for the downgrader cohort. And they do upgrade again.
Alicia Reese:The survey that we do every quarter, and we've been doing this for a few years now, it shows that shift from churning to just downgrading and then upgrading from to and from the ad tier. And over time, it keeps those Netflix subscriber numbers very stable. And and that's certainly the the case in The US and in markets where the ad tier is is pretty prominent. Of course, less so in in markets where that's not the case where advertising is not really the the go to, and Netflix may not make as much on that. So there are a lot of different ways to look at this, but I think that's the easiest way.
Alicia Reese:That's the most intuitive way as far as I'm concerned.
Dan Fahy:Your note on the results has Netflix on track to double its ad revenue by end of twenty six to roughly 3,000,000,000 US dollars. How is Netflix managing the engagement and ad yield trade off in practice?
Alicia Reese:Yes. So we typically run an adviser call every quarter as well, in addition to our survey work. And our adviser gave us some really interesting information this last quarter in that Netflix was really careful about how it was delivering the ads across its content. So it was really careful to not over advertise on its flagship content, where it was pushing through quite a few ads across its serial content, kind of downstream content that it had received usually on license agreements. It also has a lot of licensed content that people are used to watching ads on, say, when it had the Friends series or Seinfeld, people know that they expect the ad breaks.
Alicia Reese:They don't expect to go straight through. It's actually kind of jarring to watch that without some sort of break in between, because that's how the content was set up. So of course, they're gonna watch that stuff without being too jarred by it if they're on the ad tier. Contrasting that with the live sports, those ads run across the tiers. So it doesn't...
Alicia Reese:They don't have to be on the ad tier to distribute ads across live content, particularly sports, particularly where advertisers are willing to pay significantly more for that. And so they don't have to advertise equally across all of their content. WWE content, they have ads across all of the live portions of that, across all of the premium tiers, as well as the ad tier equally, and there's no churn. There really, there's no dynamic sense of of those subscribers. They're very intense followers of the WWE.
Alicia Reese:I I think you're gonna see that with most of the sports content, particularly as Netflix continues to ramp that up. Women's World Cup is coming up. You're gonna see some people signing up for that. And Netflix's opportunity with all of these sports content is to keep people there. It's easier to sign somebody up on a very inexpensive ads here.
Alicia Reese:And so pulling them in through either sports or their marquee content is really that top of funnel. Let's pull them in. How do they keep them? You have fun games, you have podcasts, you have a lot of serial content, something for everybody. And that's what they're trying to do.
Alicia Reese:That's the attempt overall, of course. But making sure that they don't push people away on that ad tier by over advertising across their service is key for them. And I think that's been a really important factor in keeping that churn level very low. And they do, their ad load is industry low. It's still that three to five minutes per hour of ads, rather than the kind of three to four minute range they did initially cite, but that's still significantly lower than any of their competitors.
Dan Fahy:And just staying with that, the ramp up to the 3,000,000,000, how would your portion where that comes from? Is it more ad load? Is it just more prevalence of ads across content where they're being a bit cautious? Is it more people into the ad tier? Like, how do your portion where the growth comes from?
Alicia Reese:Yeah. This is a great question and very important to the story. The CPMs have continued to track lower. So you had cost per 1,000 impressions, which are the CPMs. They had tracked from the mid thirties down to the roughly 30 to 32 range this past couple quarters.
Alicia Reese:They initially came out in in US dollars at around $65 and that was massively high. There was so much demand for Netflix's very premium ad spots on its service initially, but it had no targeting capability. It had no real capabilities to give back to advertisers. And advertisers have been... Become significantly more savvy.
Alicia Reese:There's so many more services for fine tuned targeting. And Netflix has just had to build that out. They just didn't have that early on. And as they do, and as they continue to expand their content offerings, their CPMs can continue to elevate. I think you have one side of it that they're not willing to advertise too much across their marquee content.
Alicia Reese:And so you're going to have some very high CPM ad spots across that. And it's going to be very curated for advertisers. They're not going to let just any old advertiser advertise across that. But they also don't want too much repetition in advertisements across that content. They want something relevant, engaging, and something that the advertisers can be highly targeting with.
Alicia Reese:So then you have your sports content, which naturally has high CPMs, whatever the sports content is, especially if it's in The US, if it's NFL, perhaps the Women's World Cup will be decent CPMs. The more Netflix does add on more sports content, I think the more those CPMs can rise. So that's one area. They also need to increase engagement, of course, on the ad tier. And to do so, I think it's important that they continue to keep a varied content breadth across their platform that engages people across the household.
Alicia Reese:The differences of what they're bringing in such as podcasts and other types of content that can compete with YouTube as a platform as well. And that's really key. And that's also a major risk that they're taking right now and how they're expanding their content. They've been expanding video games for a while, and they could go the route of doing video games. They seem to be going the route of video games as a mobile video game look and feel.
Alicia Reese:And in that, there's a lot of space to advertise against that. Whether or not they do that, we'll see. But they certainly can. They won't across the children's video games. But adult video games, they they certainly can.
Alicia Reese:And and part of that is not just ecommerce types of advertisements that you'd see across connected TV, but user acquisition, trying to get you to go to other games. It's a very big market. They could make quite a bit of money. We'll see how that goes. The podcast's natural advertising platform for them.
Alicia Reese:I think they could do quite a bit with that short form content, but they really have to be careful going too far with a short form content, I think, and how they advertise against that. So this is not without risk, but I think it's a very important avenue that they can... They will continue to go down to differentiate themselves from their longtime competitors, you know, Disney Plus and and Paramount and the like, and compete on a larger scale with all of them and with YouTube as they move forward.
Dan Fahy:I'd be interested to stay with that content proposition thread with you a little bit. If you step back, you can see this divergent content strategies in play here, where on the one side, you've got the premium sports live events. And on the other side, you've got the more atomized, if you like, creator podcast, games, etcetera. Do you see those as necessary complements to one another, or is one structurally more where the weight of effort's going to go for Netflix?
Alicia Reese:Yeah. I think Netflix is trying to take a different track than a lot of its competitors with sports like Disney has ESPN and other sports properties. Everyone else bids on different sports properties from season to season. It's a very tricky line that Netflix has gone down in taking sports as more of an eventized piece for their platform. In that, they see how expensive it is to bid on a whole season.
Alicia Reese:And if they get in the bidding war, the prices naturally go higher. And they want to steer clear of that to whatever extent that they can, while continuing to add more sports onto the service. They clearly walked away from the f one deal. They have added more NFL. They added the Women's World Cup.
Alicia Reese:I do think they're going to supplement with some other global sports. I've long thought that they would that it would behoove Netflix to take on some interesting sports that have strong regional fan bases that would perhaps do better on a global stage. Aussie Rules football. Let's call that one of them. It's a great sport.
Alicia Reese:It's really fun to watch. There's a really strong fan base that I think would translate well globally, if shown globally. But you have to show it globally. People have to know about it, and they have to have access to it in a reasonable time frame without having to pay $150 a month to have access to it. So that's a tricky one.
Alicia Reese:Rugby might be a more accessible one to start with because it's a little bit more global. You know, there are a variety of things they can do. But but let's see. You have a variety of different things that Netflix can do here. But one of the things they did, I think that was really surprising to many was was taking on the TF one deal in France.
Alicia Reese:That was really unusual, I think, for Netflix. And that really plays to your theory that they're going over to just being a full platform. It's a really great argument that they supported with that deal. The engagement that they're able to drive on that with that sort of deal. I think it's is a testing ground to see whether they should do that elsewhere.
Alicia Reese:And whether they do that with sports content solely, or wider channels, wider distribution channels. I think it'll be really interesting to see where they go with that. But I think they're just they're in a testing phase with sports. They're not sure exactly what to do with that. But they clearly want to be a platform and get all of the content that they possibly can from all sorts of every every arena where people find ways to be engaged, see what sort of advertising that they can put in front of that, or alongside it, give their customers options of whether to be on a premium tour where they they have no ads or just ads against sports, where they'd be used to it, and give people an opportunity to trade down when necessary, or give people who don't have much money to spend a free option.
Alicia Reese:And I think they're heading in that direction as well. Certainly in some markets where they have mobile only or free tiers where they have more advertisements against that. I I think they're testing a lot. This might be a slightly bumpy road for investors for a little while as they do all of this testing. But frankly, they have the money to do it.
Alicia Reese:They have the cash flow. If investors are patient, I think they will find what works as they always have, and they'll lead the pack.
Dan Fahy:Fascinating. And I think in your note, you sort of described the period ahead as being potentially noisy, but you do paint a picture of the backbone being an advertising ramp layered with games, podcasts, and and you also and you you touched on it just briefly before around this eventual move perhaps into performance marketing. And do you really does advertising alone carry that next leg of growth, or do they need to push harder into some of these more adjacent or lower funnel diversifications?
Alicia Reese:The latter. I I advertising is key, particularly in markets like The US, The UK, and and a few other locations. But it certainly can't be the end all for for Netflix. It is a huge portion of our positive view on their growth trajectory and why we've remained positive on the company overall because they think it's gonna be the largest portion of their growth trajectory. But I think as they reach saturation in certain markets within The US and EU or EMEA overall, the advertising tier becomes very important and the engagement.
Alicia Reese:But but also that lack of churn, You know, the less people churn, the more they need Netflix to access all of the content that they want to access throughout each month, then Netflix is gonna see those dollars. And they're gonna be able to do more with those dollars, especially if they're very careful about where they drive advertising dollars from throughout the offerings. As they continue to grow internationally, I'd say advertising is less and less important. The pricing of the service against the content spend will become more important. So I it's a balance overall.
Alicia Reese:I think it's really a regional balance. And I do think the opportunity that they had with the Warner Brothers acquisition was to spend less on content over time, by not no longer having to license that because they have to license a lot of this content into perpetuity. And that's that's hugely expensive down the road. And so I think what they're what they want to do, of course, over the time they produce more content of their own, but they'd like to have more library content that they can rely upon without having to re license because maybe that becomes more expensive down the road and they don't want to deal with that. They want to continually have more and more to draw from over time and good studios to build new content streams.
Dan Fahy:Alicia, Netflix have made modifications in recent months to the way they're thinking about theatrical release of their films. How do you see that playing into their future outlook?
Alicia Reese:This is a really important point, I think, that gets overlooked now because it's a small point. And I think the the theater companies and other studios have taken notes, but I'm not sure that investors have. The theatrical release with though is very profitable for studios and Netflix has bypassed that by and large for its entire existence. But it's just starting to see the benefit of it. One, it's profitable.
Alicia Reese:Two, all of the studios, and I think Netflix is now realizing that all of the other studios have already gotten to this point, that it does not cannibalize the streaming ecosystem when you have a exclusive theatrical window release. And so Netflix is toying with this. The other benefit is that they're able to sign more valuable talent to the service and to deals if they do have exclusive theatrical window because a lot of Hollywood talent and talent elsewhere in the world really wants that exclusive theatrical window. And so they get a profitable window that doesn't cannibalize their streaming window, and they get a lot more high quality talent on board with them. They have the Cliff Booth coming to movie coming to IMAX theaters around The US's Thanksgiving period, which is very big shopping period, big movie going period.
Alicia Reese:And then early in next year, they're releasing Narnia, which I think is going to be a really big hit for them. And they're... They initially wanted that as our Thanksgiving IMAX only release. And it was supposed to be a very short specialty release for about a month. And now it's going to be wide release in a really quiet quarter.
Alicia Reese:And I think this is gonna be one more testing ground for them to see that they have yet one more really nice revenue stream and a profitable revenue stream at that. Because a theatrical window, it doesn't just serve as box office tickets. It serves as a really nice marketing window for them as well.
Dan Fahy:I've got one other question. Part of the focus of this podcast is people in media who are in the middle of the organisation or middle of their careers. You have a really unique vantage point across the wider media sector. You're seeing the changes in real time. I'd be really interested to hear what advice you might have for people who are starting their careers in media or making their way in media, how they should think about their careers, given all the change that's afoot.
Alicia Reese:There is so much change afoot. There is so much consolidation in this space, so it is very tricky. I think some of the more well known proponents of AI in the industry are Ben Affleck and Netflix that with our deal in AI to use that to their advantage without damaging the industry. And they're really toeing the line there in many ways, perhaps. And the the industry at large has taken many, many steps to be very cautious about that and retain the jobs and retain the industry as it is.
Alicia Reese:Because what we don't want to see, I don't think anyone wants to see full length AI features with no heart and soul. You really want to see real life, real life talent coming through the screen. You want to see nuance. You want to see the actors that you love so much or or hear their voices across animated characters. Perhaps we don't always want that.
Alicia Reese:But those factors are very important. I'd say AI is a great tool within media and entertainment for reducing post production time, which does impact jobs. I would say be cautious if you're looking into any sort of post production that you really understand how to utilize AI to create value for whatever production company you're working from or distribution house. Marketing is becoming ever more important. You can utilize AI for creating or enhancing marketing campaigns.
Alicia Reese:And I think that's really important. But marketing is always going to be a big portion of media, and it's becoming ever more important. And performance marketing, even more so, I think is becoming a very important part of the connected TV landscape and across video games. So if you're within any of those fields, understanding how that works and how that's evolving is incredibly important. I think those are really the most important factors from my end of the world.
Alicia Reese:Looking at it from an investor's perspective, I think media consolidation is gobbling up so many public companies. And so really what's being left behind are either legacy media properties that are utilizing their cash well and gathering content into one place, or they're focusing significantly on the advertising side of the world. I think that's really important. But I also think it's important to look at all of the companies that are aligned with media, but not necessarily within the media space and see how they currently factor in and how they'll factor in the future and what remains at the end of that. It's a tricky space right now, certainly.
Alicia Reese:And it's it's evolving very, very quickly. So I think knowing as many people as you can in the space, talking about the space a lot and getting contacts wherever possible is really important to keep up on this conversation.
Dan Fahy:Great. Alicia Reese, thank you. This has been a very illuminating conversation. I'm very grateful for your time.
Alicia Reese:Thank you so much. Appreciate it, Dan.
Dan Fahy:That was Alicia Reese. Thanks for listening. I'm Dan Fay. Original music by Lee Roseveer and So Cal. And if you like this episode, please share with a friend or colleague.